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Composition of Capital Flows: A Survey

  • Koralai Kirabaeva
  • Assaf Razin

We survey several mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). We focus on information frictions such as adverse selection and moral hazard, and exposure to liquidity shocks, and discuss the following implications for composition of capital flows: 1. home court information advantage; 2. panic-based capital-flow reversals; 3. information-liquidity trade-off in the presence of source and host country liquidity shocks; 4. moral hazard in international debt contracts; and 5. risk sharing role of domestic bonds in the presence of home bias in goods and equity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16492.

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Date of creation: Oct 2010
Date of revision:
Publication status: published as Koralai Kirabaeva and Assaf Razin “Composition of Capital Flows” Encyclopedia of Financial Globalization , Elsevier , October, 2012.
Handle: RePEc:nbr:nberwo:16492
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  1. Loungani, Prakash & Mody, Ashoka & Razin, Assaf, 2002. "The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 526-43, December.
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  14. Itay Goldstein & Assaf Razin & Hui Tong, 2008. "Liquidity, Institutional Quality and the Composition of International Equity Outflows," NBER Working Papers 13723, National Bureau of Economic Research, Inc.
  15. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers 691, Board of Governors of the Federal Reserve System (U.S.).
  16. Rui Albuquerque, 2004. "The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment," International Finance 0405004, EconWPA.
  17. Hyun Song Shin & Viral Acharya & Tanju Yorulmazer, 2011. "Fire Sale FDI," Korean Economic Review, Korean Economic Association, vol. 27, pages 163-202.
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